Regional Rural Banks

The banks which are present in India are divided into 3 major groups namely, Central Bank
(RBI), Scheduled Banks & Non-Scheduled Banks. This means other than RBI, every bank
will be either a scheduled bank or a non-scheduled bank. Based on the functions, there are
five categories of Banks in India viz. Central Bank (RBI), Commercial Banks, Development
Banks, and Cooperative Banks & Specialized Banks.

Further Scheduled banks are classified into scheduled commercial banks & scheduled
cooperative banks. The basic difference b/w them are in their holding pattern. Regional Rural
Banks comes under scheduled commercial banks.

Regional Rural Banks

RRBs were established in 1975 under the provisions of the ordinance promulgated on 26th-
sept-1975.
Every RRB is owned by 3 entities with their respective shares as follows:
Central Government -50%
State government-15%
Sponsor bank -35%

 Functions:
o The basic functions of a bank can be summarized as follows: 
 To provide safety to the savings of customers 
 To create credit and increase the supply of money 
 To encourage public confidence in the financial system
  To mobilize the savings of public 
 To increase its network so as to reach every segment of the society 
 To provide financial services to all customers irrespective of their level of
income
 To bring in social equity by providing financial services to every stratum of
society.
What are the Issues Related to RRBs?

 Rising Cost: The rising cost of operations of  Regional Rural Banks (RRBs) as
compared to scheduled commercial banks.
o  The government wants them to work towards increasing their earnings.
 Limited Activities: Due to the fact that many of these branches don't have enough
business, they are incurring losses.
o In rural areas, they mainly offer government schemes like Direct Benefit ransfer.
 Low Internet Banking: At present only 19 RRBs have internet banking facilities and
37 have mobile banking licenses. 
 o Existing regulations allow only those RRBs to offer internet banking which
maintains minimum statutory capital to risk-weighted assets ratio (CRAR) of
more than 10%.
What are the Suggestions by the Government?

 It has asked RRBs to move towards digitization, including offering internet banking
services to its customers and expanding their credit base further through increased
lending to the Micro, Small, and Medium Enterprises (MSME) sector.
o So that they become financially sustainable 
 It urged the sponsor banks to formulate a clear roadmap in a time-bound manner to
further strengthen the RRBs and support the post-pandemic economic recovery and
o Also, suggested conducting a workshop on RRBs and sharing the best practices
with each other.
How are RRBs being Reformed by the Government?

 Over the years, various steps have been taken by the government to increase the
contribution of people to the financial system of India. 
o In 1969, a major renovation in the banking sector took place with
the Nationalization of all the Banks existing in India. In the year
1981, the National Bank for Agriculture and Rural Development
(NABARD) was established. 
 The main aim of establishing NABARD was to promote sustainable and
impartial agriculture and enhance rural prosperity through effective credit
support, related services, institution development, and other innovative
initiatives.
 Hence, the National Bank for Agriculture and Rural Development (Nabard) will
spearhead the initiative to revive the RRBs.
o Further, the development bank is already working on a roadmap for 22 RRBs
which is expected to be implemented by the end of this year.
 The plan also included merging branches of these RRBs with sponsor
banks once these branches reach a certain level of business.
o Last year, the government set up a panel with members drawn from Nabard and
the RBI to give recommendations for strengthening the regional lenders. 
 The government has contributed RS 4,084 crores towards RRB
recapitalization in 2021-22, of which Rs. 3,197 crores has been released to
21 lenders. focus on financial inclusion by leveraging technology
Way Forward

 There is a need to have a common framework for RRBs, along the lines of core
banking solution (CBS), so that all of them can provide online banking services to
their customers and further, enhance their outreach and profitability.
 There should be more like internet banking etc.
 Further, they need to increase their efficiency and touch various other dimensions of
banking, like providing loans to merchants, MSME’s that could increase their
profitability.

Difference Between RRB and Corporative Banks

o Ownership – They are maintained by 3 different bodies as mentioned above.

o Regulation- They are regulated by NABARD, which is a subsidiary of RBI.Other
banks in India are directly regulated by RBI.
o Statutory Background –These banks have a distinct law behind them viz. Regional
Rural Banks Act, 1976.
o Statutory pre-emptions – RRBs need not maintain CRR (Cash Reserve Ratio) & SLR
(Statutory liquidity ratio) like any other banks.

Reasons for establishing the RRBs:-

Even after nationalisation, there were cultural concerns which made it difficult for
commercial banks even under the ownership of government, to lend to farmers. So Regional
Rural Banks were started to work in rural perspectives & they can lend to more & more
farmers, who are in real need of money. To provide them constitutional background, a
separate act was passed.

Various problems of RRBs:-

RRBs were considered as a low-cost organisation having a rural philosophy, local touch &
pro-poor focus. Each bank was to be funded by a ‘Public Sector Bank’ (PSU), though; they
were planned as the self-sustaining credit institutions which were able to refinance their core
resources in themselves & were expected from the statutory pre-emptions. There were 196
RRBs in India in1990.This has reduced to 56 (as of mar-2014) after mergers &
amalgamations.

Current government’s policy:-

The Modi govt. has put the hold on further mergers of the RRBs. The government is focusing
on improving the performance of RRBs & to explore new opportunities in the same. At
present, there is a bill pending to make some amendments in the RRB act which is aiming to
increase the pool of investors to tap capital for RRBs.
COOPERATIVE BANKING
A cooperative bank is jointly owned enterprise in which same people are its customers who
are also its owners. Therefore, the basic difference b/w scheduled commercial banks & a
scheduled cooperative bank is in their holding pattern. These are registered under
Cooperative societies Act. The cooperative banks work agreeing to the principles of mutual
assistance.
These cooperative structures are one of the largest networks in the world comprising of more
than 200million members.

History
Hermann Schulze & Friedrich Wilhelm Raiffeisen gave the idea of cooperative banking for
the first time. In India, the history of cooperatives begins from 1904 when the cooperative
credit societies act, 1904 led to the formation of societies in both rural & urban zones. The act
was recommended by Sir Friedrich Nicholson (1899) & Sir Edward Law (1901).The
cooperative societies act of 1912, further gave recognition to the formation of non-credit
societies & the central cooperative organisations.

Extent of Cooperative Banking in India

Further, it is divided into 2 broad categories namely, Urban Cooperative Banks & Rural
Cooperative Banks.
Urban cooperatives have been further divided into scheduled & non-scheduled. Both
categories are again divided into multi-state & single-state. The majority of these comes
under no- scheduled & single-state category. All the activities of urban cooperatives are
monitored by RBI.whereas; it is regulated by RBI & NABARD for rural cooperative banks.

Significant features of Cooperative Banking in India:-

These are small financial institutions governed by Banking Regulations Act,1949 & Banking
Laws cooperative Societies Act, 1965
Owned by its members
Involved in community development
Bringing banking to the doorstep of the lowest section of the society
Profits obtained will be combined to form some reserves while some amount is distributed to
members.
Some sections of banking regulation act are not applicable to cooperative banks

Problems faced by Cooperative Banks in India:-

The state partnership has resulted in excessive state control & interference. Inactive
membership has made them declining as there is the lack of dynamic & professional attitude.
Credit retrieval is weak, especially in rural areas.